Webster Financial Corp: A Debt-Free Cash Cow On Sale

| About: Webster Financial (WBS)
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Summary

Webster Financial Corp is a highly profitable company.

It trades at a low multiples.

As a debt-free company, it is a cash cow.

Webster Financial Corp (NYSE:WBS) is currently offering investors an opportunity to buy portions of the company at about $36/share. The stock has been moving sideways for the past six months, putting in a solid base in the $36 range and may now provide a good entry point as it has touched a low at the beginning of July and has moved up sharply to this $36 point. Right now, WBS is about ten percent off the 52-week low and has moved up this past month on a good earnings report. This multi-month base at $36 provides long-term investors with a good opportunity to initiate a position.

Webster Financial Corp has a business model that is simple and sustainable. The company is a regional bank serving the Northeastern United States that focuses on middle-market businesses, in addition to retail banking. Being a regional bank, it's not subject to as many regulatory hurdles as the larger banks. According to its most recent annual report, total assets actually grew by 106% year-over-year, including 13% growth in loans and leases. A main draw of this company to me is its sheer profitability. Its operating margin is 80%, and its profit margin is over 24%. That's incredible! The company is able to increase its income at a rate that crushes inflation, passing along the devastating effects of inflation on to their customers, not their shareholders.

Despite the growth, I believe the company trades at a discount to its true valuation. WBS currently trades at 15 times forward earnings and only seven times cash. WBS appears to be heading in the right direction as a company, and I would be content to accumulate shares at this perceived discount. EPS has grown by 30% annually for the past five years. Even if future EPS remains flat, you're still only paying fifteen times earnings, putting it in the middle of its competitors in the Northeast regional banking industry. WBS is the type of company that I want to own for the long haul, and this appears to be an opportune time to initiate my position.

Webster Financial Corp also has a decent yield: You get paid to wait while revenue growth and EPS growth take your investment higher over the years. WBS has a current yield of 2.8%. Is the dividend sustainable? Absolutely. Its payout ratio is at 33%, giving it ample room to increase its dividend. And increase it, it has. WBS is a Dividend Challenger, having increased it's dividend annually for the past six years, and is included on the famous 'CCC' list, produced by David Fish. Additionally, WBS is sitting on $4.89 of cash per share. That's about twenty quarters' worth of dividend payments at the current rate!

Despite the above positive factors, the main attractive quality here is to buy a highly profitable, quality company at fifteen times earnings. Even if profits were to stagnate or regress from here, it's still trading at only seven times cash on hand. Additionally, and this point can be overlooked, the company has virtually no debt (about $200k, less than 0.1% of assets). This is a profitable cash cow of a company with solid free cash flow, high margins, no debt, trading at a low earnings multiple.

As always, this article represents my opinions at the time of writing. You should do your own due diligence before making any investment decisions. However, I believe that Webster Financial Corp represents a quality company that is trading hands at a discount. Please provide your feedback in the comments section below and follow me to be notified of any future articles that are published.

Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in WBS over the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.